The dramatic downturn gripping the global economy has breathed new life into old questions about how best to run our economic systems.
Politicians, business leaders and policymakers searched for solutions at this year’s World Economic Forum in Davos. Meanwhile, different debates were taking place at the “alternative” World Social Forum in Belem, Brazil.
There, an eclectic mix of some 100,000 campaigners, thinkers, and working people came to starkly different conclusions about the causes of the downturn, and how best to address it.
We asked four participants from around the globe to give us their opinions.
Walden Bello is a university professor, senior analyst at Focus on the Global South, and president of the Freedom from Debt Coalition.
Week after week, we see the global economy contracting at a pace worse than that predicted by the gloomiest analysts. We are now, it is clear, in no ordinary recession but are headed for a global depression that could last for many years.
The origins of the present crisis lie in the strategies adopted by economic and political elites to resolve the crises of stagflation – the coexistence of low growth with high inflation – which followed rapid growth in the post-World War II era, both in the G8 economies and in the underdeveloped economies.
Stagflation, however, was but a symptom of a deeper problem: the reconstruction of Germany and Japan and the rapid growth of industrialising economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while income inequality within countries and between countries limited the growth of purchasing power and demand, thus eroding profitability.
This produced the dilemma of overproduction.
One “escape route” from the conundrum of overproduction, and for maintaining and raising profitability, was “financialisation” .
With investment in industry and agriculture yielding low profits as a result of over-capacity, large amounts of surplus funds have been circulating in or invested and reinvested in the financial sector – that is, the financial sector began turning on itself.
The result has been a divergence between a hyperactive financial economy and a stagnant real economy.
This was not accidental – the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy.
Profits, not value
One indicator of the super-profitability of the financial sector is the fact that 40% of the total profits of US financial and nonfinancial corporations is accounted for by the financial sector although it is responsible for only 5% of US gross domestic product (and even that is likely to be an overestimate) .
The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it does not create new value – only industry, agriculture, trade, and services create new value.
Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value.
Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a “correction” , that is, a crash back to real values. The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.
We are far from over the worst of this crisis.
In the US real-estate sector, millions more mortgages are likely to go into default over the next few years.
Securities with a value of as much as $2 trillion dollars (£1.4 trillion) have already been injected, like a virus, into the global financial system.
Massive injections of taxpayers’ cash have failed to kickstart lending again. Not surprisingly, with global capitalism’s circulatory system seizing up, it was only a matter of time before the real economy would contract, as it has with frightening speed in the last few weeks.
Globalisation has ensured that economies that went up together in the boom would also go down together, with unparalleled speed, in the bust, the end of which is nowhere to be discerned.